The lockdown due to Covid-19 would mean that States with a high budgeted share of committed expenditures (salary, pension and interest payments) are at a higher fiscal risk than those with a low share.
States with low share of committed expenditure will be in a better position to tide over the fiscal crisis, says Jose Sebastian, public finance expert and formerly faculty at the Gulati Institute for Finance and Taxation, Thiruvananthapuram.
Irrespective of the revenue situation, committed expenditures are there to be met. Fiscal risk from the revenue side gets considerably mitigated if the expenditure structure is flexible, Sebastian told
On the other hand, States with high committed expenditures will have to use the lion’s share of the borrowed funds to meet the committed expenditures, leaving their productive sectors to languish. This, Sebastian said, calls for a rethinking on the very concept of committed expenditures.
The burden of the coronavirus pandemic has to be shared more or less equally by all citizens. Businesses have declared a salary cut in an attempt to cope with the slowdown. “Is it not incumbent on the government to support businesses that create employment and income for the ordinary people, and public resources?" wonders Sebastian. It is high time the ‘untouchability’ attached to salary and perks of government employees makes way for a level playing field, he feels.
Direct taxes vs indirect taxes
Giving a breakdown, Sebastian said that indirect taxes such as goods and services tax (GST), state excise and sales tax account for nearly 70 per cent of the own revenue of States. The lockdown has brought production and consumption to rock bottom and this is going to impact the revenues from indirect taxes.
Direct taxes are comparably less vulnerable to the Covid-19 disruption but they account for less than 15 per cent of own revenue. Another 15 per cent comes from non-tax revenue sources. Dividends and profits from public sector enterprises, user charges on services in social and economic sectors, and lottery are the major sources of non-tax revenue. The revenue from these sources, except lottery, is least prone to the effect of Covid-19.
Kerala’s unique situation
States with a wider base of direct, indirect and non-tax sources are more resilient than States that have put all their eggs in one basket. A typical example is Kerala which, in 2016-17, mobilised 58.78 per cent of own revenue from four sources — liquor, lottery, petroleum products and motor vehicles. With the lockdown, the state-owned Beverages Corporation dealing in wholesale and retail marketing of liquor has closed its outlets as well as private bars. Sale of petroleum products too has drastically fallen, while that of lottery and motor vehicles has all but dried up. There may not be many States that find themselves in Kerala’s situation, Sebastian said.
Share of committed expenditure in revenue expenditure of major states-2017-18
(Source: Reserve Bank of India)